iQiyi, the "Netflix of China," Leverages Local Online Movie Boom

With its unique 50-50 revenue split and a new IPO, the streamer has struck gold with features made specifically for the internet.

While music streamer Spotify's IPO is generating the most headlines, Chinese streaming video giant iQiyi somewhat quietly went public March 29 on the Nasdaq exchange, raising about $2.25 billion for a valuation of $12.7 billion.

The cash influx of the second-largest IPO by a Chinese company will be integral to helping iQiyi, led by founder and CEO Tim Gong Yu, retain its slight edge over rivals Tencent Video and Alibaba's Youku Tudou. But the fresh capital infusion alone won't be enough over the long term.

As of January, iQiyi, a subsidiary of search company Baidu Inc., ranked first among Chinese video platforms with monthly active app users totaling 509 million, versus Tencent Video's 480 million and Youku's 420 million, according to local research firm Analysis.cn. Yet iQiyi's competitors are backed by China's two most valuable internet firms, both with a market cap that dwarfs iQiyi's parent Baidu. (Tencent is Asia's most valuable company at $495 billion and Alibaba is worth a whopping $470 billion, while Baidu clocks in at $77 billion.)

To claw its way to 60.1 million subscribers — the most of any Chinese streamer — iQiyi has had to innovate rather than simply pour capital into licensing and originals. A promising new tool in that effort has been a unique revenue-sharing model targeting China's burgeoning market for online movies.

As recently as 2015, filmmaking for the internet in China was equated with the basest of B-movies — cheaply made comedies, censorship-testing erotica or a local genre invention known as the "monk zombie movie." But the sector exploded in 2016, with 1,780 online movies produced for the platforms, up from 689 titles in 2015. That same year, the government upped its scrutiny of the formerly overlooked sub-channel, issuing a new set of guidelines that read: "some online programs have manifested distorted values, hedonism, and inferior quality ... strengthened guidance is urgently needed."

Sensing an opportunity, iQiyi joined the effort to professionalize China's online movie space. The company began offering an enticing 50-50 revenue split to titles that hit certain criteria for craftsmanship and quality. "With this model, the incentives between the platform and the content providers are highly congruous," says Ge Xufeng, deputy general manger of iQiyi's membership business department. "We share the risks and the profits together, and we both have an incentive to market and promote the content to the best of our ability."

Reflecting the uptick in oversight and the new emphasis on quality over quantity, the number of internet movies produced in China in 2017 declined slightly to 1892 titles. Yet iQiyi paid out 54 percent more revenue to its content production partners last year than it had in 2016. iQiyi says the revenue surge matches a spike in viewership for the higher quality newest titles.

IQiyi's The Ferry Man: Manjusaka, a fantasy drama based on a traditional Chinese myth, is the most successful online movie on the streamer in 2018. The film generated 61 million yuan ($9.6 million) in its first month of release, half of which went directly to the production company, Beijing Perfect Credit Pictures.

Attracted by the speedy but substantial potential returns, China's most established film companies have begun allocating greater resources to the online movie space. Last year, veteran studio Huayi Brothers Media announced a plan to produce more than 30 new series and non-theatrical movies, with the intention that at least 70 percent will be distributed over streaming video platforms rather than traditional TV outlets.

Thus far, China's legacy studios don't see the rise of streaming video as a competitive threat to their core business of theatrical film production in the same way that U.S. studios have begun to regard Netflix with suspicion — mostly because China's theatrical box office also continues to boom. "The growth of streaming-video is a pure increase; it's not a transfer from other markets [as it is in the U.S.] — all our channels are growing here in China," says Huayi Brothers president Wang Zhonglei.

Younger companies are also emerging to exclusively target online distribution channels, though. New Studios Media Group, launched in 2012 in Beijing, produces about 100 online films per year, the majority of which are distributed through iQiyi's revenue-share system, with others licensed to Tencent and Alibaba for flat fees. The company, which counts Perfect World Pictures and Sequoia Capital among its investors, recently closed a funding round at a valuation of 1.2 billion RMB ($190 million).

"[China's] online film industry is like our traditional theatrical cinema business in 2010," says New Studio's 29-year-old founder Yin Xiangliang. "Over the next five years, the [earning potential] for the two sectors will come to be basically the same."

A version of this story first appeared in the April 4 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.